Upwork IPO: When Revenue Retention Alone Doesn't Tell a Full Story

Upwork filed for IPO and disclosed some (not all) key customer-related metrics. Daniel McCarthy, co-founder of Theta Equity Partners, shared his thoughts on what was reported and what's missing. Interestingly, instead of disclosing client retention (or churn) they focus on “client spend retention” – a ratio of recurring client spend to client spend a year ago. The problem is that this metric conflates two different processes – actual client churn and revenue expansion from retained clients. Upwork believes that “client spend retention is a more useful indicator of the health of their business” because “we can lose a significant number of non-core clients [those with total spend < $5,000] in any given period without experiencing a significant impact on our client spend retention … or revenue”.

It would be true if revenue was the only thing that mattered. However, they paid to acquire each of those churned clients and even if losing a non-core client does not significantly impact the top line, it definitely impacts the effectiveness of their marketing spend and therefore profitability, as they will have to spend more to replace churned clients and keep the customer base growth.

They briefly mention a 58% annual retention rate or, equivalently, 42% churn rate – this is the number to pay attention to. The churn rate must be even higher for newly acquired clients, so the big question is, how effectively / profitably do they acquire clients? It’s hard to get the full picture without having other customer-related metrics (gross acquisitions, CAC, etc.), but increasing Marketing & Sales expense as % of revenue (from 22.8% in 2016 to 26.2% in 2017 to 29.6% in H1 2018) together with this relatively high churn rate doesn’t look promising.